4/11/2012 4:39 PM ET|
Why the gold rush is over
Evidence mounts that investors should end their love affair with the yellow metal, because gold bugs are about to get squashed
It's hard to imagine the public's view on precious metals back in the early 2000s, back when companies like Sun Microsystems, and InfoSpace (INSP) still dominated investor attention, oil traded at $30 a barrel and gold as an investment not only wasn't followed, but was practically unknown.
Over the course of the following decade, the entire asset class transformed. Gold (and gold stocks) soared, turning a onetime investment backwater into the market's most sought-after asset. Gold has now been up for 11 years in a row.
With those strong returns came a proliferation of gold-following funds. Back in 2001, Central Fund of Canada (CEF) was about the only pure-play exchanged-traded means for stock investors to allocate to the yellow metal. Since then, innumerable new products have been launched, including funds like ETFS Physical Asian Gold Shares Trust (AGOL), which holds physical bars in Singapore, and Power Shares DB Gold Double Long ETN (DGP) which offers a double-leveraged bet.
What also changed was the public's level of comfort, not to mention portfolio allocation, with commodities and other alternatives. The same investors who in 1999 questioned owning anything besides Cisco (CSCO) and Microsoft (MSFT) were, by 2010, allocating as much as 25% of their portfolios to gold. (Microsoft is the publisher of MSN Money.)
The changing political landscape: more regulations, taxes, spending and demands for sacrifice (not to mention a weaker dollar) have also given people more of a fundamental reason to hold.
Physical gold satifies an emotional need as much as a financial one, a nuance tapped by companies selling bullion who romanticize gold as "something you can hold in your hand."
As we've pointed out over the years, gold's benefit as a portfolio diversification has ebbed. Recently, gold has tended to rise and fall along with stocks, acting like a risk asset itself rather than a hedge against them.
As investors, we can't afford to play favorites or fall in love with any asset. Facts are facts, and the reality of how market prices act always trumps how we think they should or hope they might act. Nothing is sacred.
And in the past few days, even the metal's most ardent fans have noticed that gold stocks are showing considerable weakness, with a slew of influential and widely owned names nipping new yearly lows.
Take Barrick Gold (ABX), Eldorado Gold (EGO), Gold Fields (GFI), AngloGold Ashanti (AU) and Newmont Mining (NEM), which are all at early to mid-2010 levels. Iamgold (IAG) trades where it did back in the summer of 2009.
As represented by the Market Vectors Gold Miners (GDX) ETF, gold stocks appear to be among the market's weakest, with the fund trading far below its 200-day moving average, even in a strong first quarter for risk. More telling is that smaller, more speculative gold stocks are doing even worse. The Market Vector Junior Gold Miners (GDXJ) ETF, which follows them, is down by nearly 50% in just the past year.
Trading is, first and foremost, observation. If you look for gold stocks doing well right now, you'll discover that they're nearly impossible to find. Of course, companies are also influenced by management and labor issues, and not just by the metal itself.
The longer-term correlation is self-evident, however. For most of the past three years, gold stocks led the metal higher, a relationship that began to deteriorate last fall as stocks slipped.
Now gold stocks are at yearly lows, and even longtime fans of the metal should heed the objectively worrisome signs.
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With the FED print 10.7% more money (M2) over the last year, and 37% more over since Obama took Office, why would everything not be 37% more expensive.
Only a fool would sell Specie in trade for paper being devalued daily.
With the rumor that China is buy gold in preperation to return to the gold standard in the next 10 years why sell? If that happens the dollar is toast as a reserve currency, and we will rapidly become a 3rd world economy...
Let the liberal's sell...
As jewelry, gold is unbeatable, I love it.
So tell me how secure gold at my abode will be.
Then tell me why a paper stating I've gold in Singapore is safer than an American Dollar.
I'll invest in gold because my wife looks good in gold jewelry. If I can afford to add a diamond, she looks even better.
As an investment gold is only another commodity, subject to whims and rumors.
You are short sited my friend. Sell your Gold, please.
Obozo has done much damage to our Nation and Economy. QE-3 is on the horizon and our money cheapens and will continue to lose value. Take a look at food prices. Vegetables, meat and canned goods get more expensive day by day. A can of Campbell Soup goes for $1.69 when not on sale.
The liberal media paint a rosey picture to support there hero Obozo. Just fiction for fools.
Gold will soar and what you consider the end game, others see as a lull, a dip, a buying opportunity.
You should try and think long term and that's not just 1 year, think further out.
Your lose will be my gain, chump!
History will indeed tell, but if gold is only $3000/oz ten years from now, it will have been an awful investment. That's less than 7% appreciation per year. In inflationary times, that's terrible.
By the way, why would the emerging middle classes in China, India, et al want to buy gold? I'd think they'd want to do some consumption.
It involves something you are forced to do this year on April 17th.
You write "take our labor and store it into this". That gets to the heart of one of my arguments.
Consider the total gold market and gold supply today. To paraphrase your words, people have stored their excess labor into gold. Today they're doing that at about $1650/oz. Suppose that the supply of gold were actually fixed (I know that's not true, but it's close, right?). Then the entire gold supply represents the sum of all the labor stored into the gold. Right?
OK. Now suppose you and thousands more like-minded citizens want to store more labor. How can they do that by buying gold? Question: Does the fixed supply of gold actually represent more labor, or is the price just inflated to accommodate the new buyers?
I claim it's the latter. The new buyers will drive up the price (paying too much for it) and when people go to sell, they won't get that price back. That's what bubbles are about.
You say the gold and silver markets can't be manipulated. Do you remember when the Hunt brothers tried to corner the silver market in 1980? I do. The price of silver went up to $50/oz. People were selling their old silverware. Adjusted for inflation, that must be something like $200+/oz for silver. When the CFTC made a rule that no more long contracts could be created, the price dropped to something like $3/oz. It stayed at around $5/oz for a long time after that.
By the way, I have essentially no financial interest in the gold market, except that it confirms a number of my beliefs about the difficulty of large numbers of people doing large amounts of saving. I consider gold to be an economic sideshow - entertaining but not important. I don't own any directly (or mining stocks) and don't intend to buy or sell it. Gold can do whatever it wants and it won't affect me much whatever the case.
Its simple; when it comes to Paper vs Gold or Silver. There is only so much of it and thus not enough for the others too use. Because of that; the world no longer uses it. They use paper; which by the way is illegal under the constitution.
ie the stock market isn't free markets; us who take the majority of us gold bugs or silver bugs take our labor and store it into this. There is only so much; and it can't be manipulated. Yes the South Carolina Treasury says this also just google search it. You go too the GovMint Website and he says JP Morgan the FED HSBC and the Rest of the Crime Syndicate Bankers are Artificially suppressing the price.
We understand your argument; we are hurting your lifestyle. The more people store wealth; the more the markets have to inflate. ie if just 20% of the population believed like us you would loose out big. Yes that's all it would take to dry up the supply. Theres only 50mil ounces mined a year supply and demand. This day will come; I teach my kids about real money and many like us on You-Tube do also; or day of reckoning is coming.
I'll make the same point to you. Nobody thinks paper dollars will keep their value. In the history of the world, paper currencies have NEVER kept their value. In fact, it's probably fair to say that the entire point of paper currency is to create inflation. My point is that of all the things you could buy, gold is one of the crummier choices.
You say that the value of gold doesn't change. Of course it does. If you define value to mean what you can trade it for (that's a pretty good definition, don't you think - certainly better than dollar price), then it fluctuates every day. That's easy enough to see in the daily papers. Just compare the price of gold to the price of oil. Surely when they diverge, it's not solely because the value of oil has changed, right? Of the two, oil is the one with a daily use. I know what a gallon of gas is good for - it will propel my car around 25 miles. As for gold, well gee, it's pretty isn't it?
Let's get back to your implied argument that gold is somehow a wonderful store of value. Well, let's ask the apparently unobvious question: Just how much value can be stored in all the gold in the world. Right now, it's worth less than $5 trillion. The entire U.S. Stock market is worth roughly $15 trillion. What do you think would happen if everyone sold their stock (who would buy it?) and tried to buy gold with the proceeds? Wouldn't you expect the price of all that gold to quadruple to at least $20 trillion? What would you make of that? Would gold be more valuable? Did the dollar lose 75% of its value overnight - even if the price of everything else stayed the same?
I think the goldbugs are buggy on this one. The conventional wisdom is pretty simple-minded about gold.
Paper money/bonds are the bubble.
One: In order for something to be in a bubble,investors have to think that it isn't.
Ex: the Keynesian notion that home prices would appreciate forever.
There are many many people like you who call gold a bubble,so people naturally are skeptical and will not invest in it(Good for people like me and Chris DiStasio).
The last 5 years the MSM has been calling gold a bubble while all it does is appreciate as money is printed ad nauseum, not because of investor demand.Real Estate prices weren't a bubble,but the one place people can safely PROTECT their purchasing power is?HHHMMM,very interesting spin indeed.
Again,gold isn't going up,the value of the dollars its priced in is declining.A dollar worth less requires MORE dollars to buy the same amount of goods.This is evident in food,fuel,healthcare,etc.None of these things is in a bubble.
Two: How can gold be a bubble when less then 1% of ALL the world's financial assets are invested in it?
The value of an ounce of gold DOES NOT change.The value of the currencies its priced in does.Not much good for anything?I can easily get dollars for my gold whenever I want.Also, why are central banks and nation's around the world accumulating gold,and why are states like Utah and SC making it money to be used for any transaction?Because it is money.
And yes,one might as well stuff their dollars under the mattress.It's accumulating the same interest-0% as it would in a bank account and its values is being debased in the same manner as any dollar denominated stock,bond or retirement plan.
I truly respect your views on the economy and hope you are doing well financially.I just don't have faith in a piece of paper that can be and is being printed into oblivion,especially since 2007.Gresham's Law is at work here and anybody who studies economic history knows it.
If gold is worthless, can I have yours?
I'm not aware of anytime in recorded history that Gold or Silver magically went to ZERO worth. Unless someone here can point to such a time, all these comments that gold and silver are not money are useless platitudes by very uneducated people.
If gold and silver are worthless, then dollars are even more worthless because dollars can be created with pratcially no effort whatsoever which is WHY the currency is going to hell in a hand basket! At least gold takes time, energy and resources to mine, not to mention, a currency of silver and gold is extremely difficult to inflate at will, which is why gold and silver bring price stability when used together. Precious metals as currency also PREVENT government over reaching to these drastic degrees we experience today because government is FORCED to NOT SPEND what it does NOT HAVE! But, with fantastic lovely magical dollars, that's no problem, just print more and viola, you're good to go while others who were HOLDING dollars just got SCREWED a little more, and more and more and more, well, you get the drift. The process will continue until the currency collapses, which is what will happen if this path that the US Government and Federal reserve are headed down is continued!
Having to aquire gold through effort IS WHAT GIVES IT ITS VALUE!!! Duh! LOL, makes me laugh that people think dollars are ok but somehow gold and silver are nonsense.
Again, if gold and silver are useless, i'll be more than happy to come to you to take it off your hands if you don't want it... : )
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